Shadman Cotton Mills Limited

Shadman Cotton Mills Limited (PSX: SHCM) was established in 1979 as a public limited company under the Companies Act, 1973 (now Companies Act 2017). It manufactures and sells yarn. It operates a ring-spinning mill and an apparel stitching unit. It has a monthly capacity to produce over 10 million kg of ring spun yarn and 100,000 woven bottom wear. The company also has two power generation plants that have a capacity of over 5MW.

Shareholding pattern

As at June 30, 2021, over 84 percent shares are owned by the directors, CEO, their spouses and minor children. A major shareholder within this category is the CEO, Mr. Shahid Mazhar, while Mr. Ahmed Bin Shahid and Mr. Muhammad Afnan Shahid each hold roughly 12 percent of shares. Individuals hold another 15 percent shares. The remaining less than 1 percent shares are owned by the rest of the shareholder categories.

Historical operational performance

Shadman Cotton Mills Limited has mostly seen a declining topline through the years, while profit margins increased in FY19, and plummeted in FY21. For seven out of ten years, it has incurred considerable losses.

In FY18, the company posted a revenue growth of over 32 percent, after declining for four consecutive years. This was attributed to a recovery seen in local sales of yarn that clocked in at Rs 486 million, versus Rs 324 million seen in FY17. The textile sector overall has been witnessing slow demand, more so, from its primary export market, China. In addition, the high cost of production also makes exports unfavorable in the global market. Moreover, prices continued to remain low. With the production cost already exceeding revenue, along with a significantly lower other income, the company’s net margin fell to its lowest thus far, of an almost negative 27 percent, with a net loss of Rs 147 million.

Revenue contracted again in FY19, by over 21 percent. Both local sales and export sales witnessed a contraction. While local sales of yarn halved year on year, export sales were down by 20.7 percent, from Rs 53 million in FY18 to Rs 42 million in FY19. After consecutively seeing a negative gross margin, the company was able to curtail production cost at almost 96 percent of revenue, which helped gross margin to improve to 4.2 percent. With additional support coming from other income at Rs 66 million, due to “old liabilities written back”, the company was able to record a positive net margin of 3 percent, and a net profit of Rs 13 million.

Shadman Cotton Mills Limited experienced the biggest contraction in revenue at 74 percent, with topline recorded at Rs 112 million, compared to Rs 4.3 billion in FY12. Local gross yarn sales reduced to Rs 123 million, while export sales, fabric, waste and raw material sales were zero. On the other hand, the company started a new division of apparel in the second half of FY20 that contributed Rs 3.5 million towards exports revenue. But due to the lockdown placed as a result of the Covid-19 outbreak, the operations had to be halted. This led gross margin to fall to an all-time low of negative 22.3 percent. With some contribution made by other income, the company was able to post a net profit of Rs 1 million, with net margin recorded at almost 1 percent.

In FY21 too the topline experienced a decline, but it was limited to 2 percent. Unlike the previous years, export sales gained precedence in FY21 in the total revenue pie, whereas local sales were lower. Local yarn sales dropped from Rs 123 million in FY20 to Rs 3.6 million in FY21. On the other hand, the apparel division generated Rs 104.7 million towards export revenue. But due to higher production cost, higher cost of fabrics, coupled with low selling price led gross loss to increase to Rs 56 million. With further expenses incurred, net loss rose to Rs 57 million, with net margin at an all-time low of an almost negative 52 percent.

Recent results and future outlook

Revenue in the first quarter of FY22 was higher by more than 10 times year on year, as it increased from Rs 6 million in the first quarter of FY21 to Rs 64 million in 1QFY22. Revenue was lower in 1QFY21 possibly due to the economy experiencing a gradual resumption of activities as lock downs eased. A major chunk of Rs 64 million in net revenue was earned through export sales. Despite the year on year growth in revenue, the loss incurred stood at Rs 9 million, with a negative net margin of 14 percent. This was attributed to the rise in higher cost of inputs and a relatively slow manufacturing process.

The overall textile sector has seen improvement as demand recovered after lockdowns were lifted for Covid-19 pandemic. Moreover, since the neighboring countries continued to grapple with the containment of the pandemic, buyers in the global market turned towards Pakistan that increased the country’s textile sector capacity utilization. On the other hand, the company’s topline has consistently seen a contraction that could continue to dent profitability. With the new apparel division contributing higher revenue, profitability may improve in the long term.

But with the onset of another variant of the virus, and the company depending on export sales for a large part, a closure of borders could have an impact on revenue.